A Sole Shareholder Rolls the Dice and Loses Big

An established businessman in Springfield, Ohio learned the hard way that he could be personally liable for his company’s debts. In the case City of Springfield v. Palco Investment Co. (2013-Ohio-2348), the Second District Court of Appeals recently issued a decision that cost the sole shareholder almost a million dollars.

Harry Denune was a skilled and knowledgeable businessman in the Springfield area. In addition to owning several pieces of real estate, he also ran 10 to 15 different businesses. These properties and this maze of companies would ultimately be his downfall.

A building on one of the properties, owned by Palco (for which Denune was the sole shareholder), was demolished by the City of Springfield because it was a public nuisance. The cost for doing this was almost $400,000. The City of Springfield filed a lawsuit to recover this cost from Palco. Shortly after the building was demolished, Denune decided that Palco should sell the two other pieces of real estate it owned. The proceeds of these sales, almost $900,000, were transferred from Palco to another Denune-owned business and then, ultimately, to Denune. As a result of this, Palco was left functionally insolvent and unable to pay its debt to Springfield.

Springfield instituted a second lawsuit against both Denune and Palco and won. The court ruled that the transfer of money to Denune was a fraudulent conveyance and, more importantly, that Denune was personally liable for Palco’s debts. This judgment, often called “piercing the veil,” came about because the court ultimately determined that Palco was merely an alter ego of Denune. That is to say, Palco was run in such a way that it became functionally impossible to separate it from Denune. What is interesting about this case is that the trial court in Clark County was willing to find that Denune was personally liable merely because he was the sole shareholder of the company. While the trial court’s decision was affirmed, the Second District did so noting that merely being a sole shareholder was insufficient. Being the sole shareholder and the company serving as an alter ego was what put Denune on the stake.

Any smaller corporation or limited liability company, whether held by a single shareholder/member or a few, must be thoroughly aware of the requirements the law places upon those owners in the operation of the business. If there are missteps, the costs can be large, just as it was for Harry Denune.